PetMed Express, Inc. (NASDAQ:PETS), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is PETS will have to follow strict debt obligations which will reduce its financial flexibility. While PETS has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess PETS’s financial health.
Is PETS growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. PETS’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. PETS’s revenue growth over the past year is a single-digit 9.1% which is relatively low for a small-cap company. More capital can help the business grow faster. If PETS is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does PETS’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, PetMed Express has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at PETS’s US$17m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$119m, leading to a 6.99x current account ratio. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
As a high-growth company, it may be beneficial for PETS to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. I admit this is a fairly basic analysis for PETS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research PetMed Express to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PETS’s future growth? Take a look at our free research report of analyst consensus for PETS’s outlook.
- Valuation: What is PETS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PETS is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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